UNITED STATES DISTRICT COURT DISTRICT OF NEVADA … · Montgom ery (“Montgom ”), Adam Daskivich (“Daskivich”), and David Murtha (“Murtha”), and their respective entities,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

UNITED STATES DISTRICT COURT

DISTRICT OF NEVADA

* * *

SECURITIES AND EXCHANGECOMMISSION,

Plaintiff,

v.

MARCUS A. LUNA; NATHANMONTGOMERY; ADAM DASKIVICH;DAVID MURTHA; ST. PAUL VENTUREFUND, LLC; MINNESOTA VENTURECAPITAL, INC.; REAL ESTATE OFMINNESOTA, INC.; and MATRIXVENTURE CAPITAL, INC.,

Defendants.

))))))))))))))))))

2:10-CV-2166-PMP-CWH

ORDER AND PERMANENT INJUNCTION

Presently before the Court is the Opening Brief in Support of Plaintiff Securities

and Exchange Commission’s Request for Remedies (Doc. #109), filed on March 14, 2014.

Defendants Nathan Montgomery and Minnesota Venture Capital, Inc. filed an Opposition

Brief (Doc. #112) on April 17, 2014. Defendants Marcus Luna and St. Paul Venture Fund

filed an Opposition Brief (Doc. #113) on April 17, 2014. Defendants Adam Daskivich;

Real Estate of Minnesota, Inc.; David Murtha; and Matrix Venture Capital, Inc. filed an

Opposition Brief (Doc. #114) on April 18, 2014. Plaintiff Securities and Exchange

Commission filed a Reply Brief (Doc. #115) on May 2, 2014.

Case 2:10-cv-02166-PMP-CWH Document 116 Filed 06/27/14 Page 1 of 25

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

I. BACKGROUND

This is a civil enforcement action brought by the Securities and Exchange

Commission (“SEC”) against four individuals, Defendants Marcus Luna (“Luna”), Nathan

Montgomery (“Montgomery”), Adam Daskivich (“Daskivich”), and David Murtha

(“Murtha”), and their respective entities, Defendants St. Paul Venture Fund, LLC;

Minnesota Venture Capital, Inc.; Real Estate Minnesota, Inc.; and Matrix Venture Capital,

Inc. The Court set out the factual background of this case in a prior Order, and the Court

will not repeat the facts here except where necessary. (Order (Doc. #108).) The Court

previously granted the SEC’s Motion for Summary Judgment, finding no genuine issues of

material fact remained that Defendants each violated Section 5 of the Securities Act, and

that Defendant Luna violated Sections 17(a)(1), (2), and (3) of the Securities Act, Section

10(b) of the Exchange Act, and Rule 10b-5. The Court then ordered the parties to further

brief the issue of what remedies were appropriate given Defendants’ violations. (Id.)

SEC now seeks as remedies a permanent injunction enjoining Defendants from

violating the federal securities laws, disgorgement of Defendants’ profits plus prejudgment

interest, civil penalties, a bar on Defendants participating in an offering of penny stocks in

the future, and a bar on Luna providing professional legal services in connection with an

offer or sale of securities purportedly exempt from the registration requirements.

Defendants oppose the requested remedies.

II. DISCUSSION

A. Permanent Injunction

SEC contends a permanent injunction enjoining Defendants from violating

Sections 5(a) and (c) of the Securities Act, and enjoining Defendant Luna from violating

Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 is

appropriate. SEC asserts an injunction is appropriate because Defendants are likely to

engage in future violations of the securities laws. SEC contends Defendants acted at least

2


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

recklessly, their conduct was not isolated, Defendants have not recognized the wrongful

nature of their conduct, Defendants’ occupations suggest they will remain involved in the

securities markets, and Defendants have not offered assurances they will not engage in

future violations.

To obtain a permanent injunction, the SEC bears the burden of showing there is

“a reasonable likelihood of future violations of the securities laws.” S.E.C. v. M & A West,

Inc., 538 F.3d 1043, 1055 (9th Cir. 2008) (quoting S.E.C. v. Murphy, 626 F.2d 633, 655

(9th Cir. 1980)). The Court evaluates the likelihood of future violations based on (1) past

violations, (2) the degree of scienter involved, (3) whether the present violation was isolated

or recurrent, (4) whether the defendant recognizes the wrongful nature of his conduct, (5)

“the likelihood, because of defendant’s professional occupation, that future violations might

occur,” and (6) “the sincerity of his assurances against future violations.” Murphy, 626

F.2d at 655. The inquiry is based on “the totality of the circumstances surrounding the

defendant and his violations.” Id.

1. The Luna Defendants

Defendants Luna and St. Paul Venture Fund LLC (the “Luna Defendants”) do not

oppose a permanent injunction from future securities law violations. (Defendants’ Marcus

Luna & St. Paul Venture Fund Opp’n to Pl.’s Request for Remedies (Doc. #113) [“Luna

Opp’n”] at 8.) The likelihood that Luna will commit future violations supports the

imposition of a permanent injunction. Luna acted with a high degree of scienter, as set

forth in the Court’s prior Order (Doc. #108). Luna does not recognize the wrongful nature

of his conduct, as demonstrated by his Opposition Brief which continues to assert that Luna

properly opined on the nature of the transactions at issue in this case. (Luna Opp’n at 2-4.)

Due to Luna’s occupation as an attorney, and his argument that a legal services bar is

inappropriate because it will negatively impact his ability to earn a livelihood, future

violations are likely to occur. (Id. at 8-9.) Finally, Luna offers no assurances against future

3


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

violations.

Nevertheless, the Court concludes the more targeted injunctions discussed below

barring the Luna Defendants from participating in future penny-stock offerings and barring

Luna from certain legal work are more appropriate than the general injunction against any

Section 5, Section 17, Section 10, or Rule 10b-5 violation that the SEC requests. To the

extent Luna violates these provisions unrelated to the penny-stock and legal services bars,

he may face prosecution or enforcement actions for any future violations regardless of

whether the Court imposes a permanent injunction barring him from further securities law

violations. The Court therefore will decline to impose a permanent injunction from future

Section 5, Section 17, Section 10, or Rule 10b-5 violations as to the Luna Defendants.

2. The Montgomery Defendants1

Defendants Montgomery and Minnesota Venture Capital, Inc. (the “Montgomery

Defendants”) respond that a permanent injunction is inappropriate as to them because there

was no finding at summary judgment that Montgomery acted with scienter, and he did not

act with scienter because he relied on Luna’s advice. The Montgomery Defendants further

argue the violation was isolated because there is no evidence Montgomery previously acted

as a statutory underwriter in a public offering, and there is no basis to conclude he will do

so in the future. The Montgomery Defendants assert Montgomery no longer works in the

securities field, has no desire to again risk criminal and civil proceedings, and Montgomery

has provided a certification attesting that he will not violate the securities laws again.

The violation at issue in this case is not isolated as to Montgomery. He has been

convicted of one count of conspiracy to commit securities fraud and wire fraud in a separate

criminal proceeding. (Defs. Nathan Montgomery & Minnesota Venture Capital, Inc.’s Br.

1 The Montgomery Defendants request the Court stay ruling on this matter until the appeal inMontgomery’s related conviction is resolved. The Court declines to indefinitely delay resolution ofthis case.

4


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

in Opp’n (Doc. #112) [“Montgomery Opp’n”], Certification of Nathan Montgomery

(“Montgomery Certification”) at 3); see also United States v. Curshen, No. 1:11-CR-20131-

RWG, S.D. Fla., Jury Verdict (Doc. #262). This factor weighs in favor of granting a

permanent injunction.

As to the degree of scienter, a Section 5 violation does not require any scienter.

S.E.C. v. CMKM Diamonds, Inc., 729 F.3d 1248, 1256 (9th Cir. 2013). Because the SEC

brought only a Section 5 claim against the Montgomery Defendants, the SEC did not

request, and the Court did not rule as a matter of law at summary judgment, that the

Montgomery Defendants acted with scienter. The evidence presented at the summary

judgment stage would support a finding that Montgomery acted at least recklessly. As

detailed in the Court’s prior Order, the Montgomery Defendants engaged in lockstep

coordinated activity in multiple steps within a short time frame with the other Defendants to

distribute their unregistered Axis Technologies Group, Inc. stock to the uninformed public.

(Order (Doc. #108) at 2-9, 18-22.) Additionally, the Court concluded the SEC was entitled

to an adverse inference against the Montgomery Defendants regarding whether they

acquired the Axis Technologies Group, Inc. shares with a view to distribute those shares.

(Id. at 18-20.)

Montgomery states in his Certification that he did not understand he was acting

as a statutory underwriter in relation to the Axis Technologies Group, Inc. stock, that he

trusted Luna’s opinion on the matter, and that he “did not intend to violate the law.”

(Montgomery Certification at 2.) Montgomery’s Certification comes after Montgomery

declined on Fifth Amendment grounds to answer questions at his deposition regarding

whether he relied on Luna’s advice. (See, e.g., Pl.’s Mot. Summ. J., Ex. 9 at 162.)

Nevertheless, the SEC did not seek summary judgment on the issue of scienter as to these

Defendants, and these Defendants now have presented contrary evidence under oath on the

issue. The Court therefore will deem this factor as neutral or weighing slightly against a

5


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26


Whether the Montgomery Defendants recognize the wrongful nature of their

conduct is ambiguous. Although Montgomery states in his Certification that he understands

the Court’s finding that he violated the law, he does not accept responsibility for his

participation, instead blaming Luna. (Id.) Elsewhere in their Opposition Brief, the

Montgomery Defendants suggest they caused no harm to the investing public.

(Montgomery Opp’n at 10.) This factor is neutral or weighs slightly in favor of granting a


Montgomery no longer works in the securities field, and now works for an

architectural and interior design company. (Montgomery Certification at 2-3.)

Montgomery also assures the Court he has matured and learned from his past mistakes.

(Id.) Montgomery expresses a desire to not be involved in the securities arena in the future,

and assures the Court that he does not want to risk his future with his wife. (Id. at 3-4.)

These factors weigh against imposing a permanent injunction.

Viewing the totality of the circumstances, the Court concludes the likelihood of

future violations, while not unsubstantial, is not sufficient to support the broad permanent

injunction that the SEC seeks against any future violations of Section 5 of the Securities

Act. Montgomery has suffered considerable ramifications, both civilly and criminally, for

his prior securities-related activities. Montgomery no longer will be working in the

securities arena, and assures the Court he has learned his lesson from the mistakes he made

as a young man. To the extent Montgomery’s assurances are insincere, he may face

prosecution or enforcement actions for any future violations regardless of whether the Court

imposes a permanent injunction barring him from further securities law violations under

Section 5. As discussed below, the Court concludes a more targeted injunction barring the

Montgomery Defendants from future penny-stock offerings is more appropriate than the

general injunction against any Section 5 violation that the SEC requests. The Court

6


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

therefore will decline to impose a permanent injunction from future Section 5 violations as

to the Montgomery Defendants.

3. The Daskivich and Murtha Defendants

Defendants Daskivich; Real Estate of Minnesota, Inc.; Murtha; and Matrix

Venture Capital (the “Daskivich and Murtha Defendants”) respond that a permanent

injunction is inappropriate as to them because they did not act with scienter, rather they

relied on Luna’s advice. The Daskivich and Murtha Defendants further argue there is no

evidence of past violations as to them, and there is no basis to conclude these Defendants

would be statutory underwriters in the future. The Daskivich and Murtha Defendants also

argue the likelihood of future violations is low because Daskivich no longer works in the

securities field, and both Defendants have submitted certifications to the Court assuring

they will not violate the securities laws in the future.

The SEC has not presented admissible evidence establishing the Daskivich and

Murtha Defendants engaged in a separate violation beyond the one alleged in this case, the

SEC has presented evidence the Daskivich and Murtha Defendants have associated with

other individuals who have engaged in separate penny-stock schemes, including

Montgomery who was convicted for participating in a pump and dump scheme with these

same individuals. See S.E.C. v. Curshen, 888 F. Supp. 2d 1299, 1301-08 (S.D. Fla. 2012);

see also United States v. Curshen, No. 1:11-CR-20131-RWG, S.D. Fla., Plea Agreement for

Robert Weidenbaum (Doc. #184), Plea Agreement for Ryan Reynolds (Doc. #219), Plea

Agreement for Timothy Barham (Doc. #220), Factual Proffer (Doc. #222), Factual Proffer

(Doc. #223). When asked about their association with these individuals, Defendants

Daskivich and Murtha invoked their Fifth Amendment rights. (Pl.’s Mot. Summ. J., Ex. 6

at 71-72, 76-77; Ex. 10 at 58-59.) While not conclusive evidence of a prior violation,

Defendants’ association with others engaged in penny-stock pump and dump schemes

weighs in favor of imposing a permanent injunction.

7


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

For the same reasons as discussed above with respect to the Montgomery

Defendants, the question of the degree of scienter is neutral or weighs slightly against

granting a permanent injunction. The evidence at summary judgment could support a

finding of recklessness. However, Murtha and Daskivich state in their Certifications that

they did not understand they were acting as statutory underwriters in relation to the Axis

Technologies Group, Inc. stock, and that they trusted Luna’s opinion on the matter. (Defs.

Adam Daskivich, Real Estate Minnesota, Inc., David Murtha & Matrix Venture Capital,

Inc.’s Opp’n to Pl.’s Request for Remedies (Doc. #114) [“Daskivich & Murtha Opp’n”],

Certification of David Murtha (“Murtha Certification”) at 2, Certification of Adam

Daskivich (“Daskivich Certification”) at 2.) Defendants declined to answer questions on

these topics at their depositions, invoking their Fifth Amendment rights. (See, e.g., Pl.’s

Mot. Summ. J., Exs. 6, 10.) Nevertheless, the SEC did not seek summary judgment on the

issue of scienter as to these Defendants, and these Defendants now have presented contrary

evidence under oath on the issue. The Court therefore will deem this factor as neutral or

weighing slightly against a permanent injunction.

Whether the Daskivich and Murtha Defendants recognize the wrongful nature of

their conduct is ambiguous. Although these Defendants state in their Certifications that

they understand the Court found they violated the law, they do not accept responsibility for

their participation, instead blaming Luna. (Murtha Decl. at 2, Daskivich Decl. at 2.)

Elsewhere in their Opposition Brief, the Daskivich and Murtha Defendants suggest they

caused no harm to the investing public. (Daskivich & Murtha Opp’n at 5.) This factor is

neutral or weighs slightly in favor of granting a permanent injunction.

Daskivich no longer works in the securities field, and now works in a custom

tailoring business making men’s clothing. (Daskivich Certification at 2.) Daskivich also

assures the Court he has matured and is interested in pursuing his career outside the

securities markets. (Id.) Daskivich states he will not engage in any future questionable or

8


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

illegal conduct in relation to the securities markets. (Id. at 2-3.)

Murtha, on the other hand, does not attest that he has a career separate from the

securities arena. However, he asserts he has matured, and he assures the Court he will not

engage in any questionable or illegal conduct. (Murtha Certification at 2.) These factors

weigh against granting a permanent injunction.

Viewing the totality of the circumstances, the Court concludes the likelihood of

future violations, though not unsubstantial, is not sufficient to support the broad permanent

injunction that the SEC seeks against any future violations of Section 5 of the Securities

Act. Daskivich no longer will be working in the securities arena, and Daskivich and

Murtha assure the Court they have learned from the mistakes they made as young men. As

with Montgomery, to the extent these assurances are insincere, they may face prosecution or

enforcement actions for any future violations regardless of whether the Court imposes a

permanent injunction barring them from further securities law violations under Section 5.

As discussed below, the Court concludes a more targeted injunction barring the Daskivich

and Murtha Defendants from future penny-stock offerings is more appropriate than the

general injunction against any Section 5 violation that the SEC requests. The Court

therefore will decline to impose a permanent injunction from future Section 5 violations as

to the Daskivich and Murtha Defendants.

B. Disgorgement

SEC requests each Defendant disgorge ill-gotten gains from their violations,

which SEC calculates as the amount of profits from each Defendant’s stock sales. SEC

contends the individual Defendants should be jointly and severally liable for the profits

from his respective company. SEC also contends Luna should be jointly and severally

liable on the amounts that Real Estate Minnesota, Inc. and Matrix Venture Capital, Inc.

diverted to Luna. Finally, SEC seeks prejudgment interest at the rate provided in 26 U.S.C.

§ 6621 for tax underpayments from the date of Defendants’ last trade of Axis Technologies

9


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Group, Inc. stock through March 14, 2014, the date the SEC filed its Opening Brief.

The Court has “broad equity powers to order the disgorgement of ill-gotten gains

obtained through the violation of the securities laws.” S.E.C. v. First Pac. Bancorp, 142

F.3d 1186, 1191 (9th Cir. 1998) (quotation omitted). “Disgorgement is designed to deprive

a wrongdoer of unjust enrichment, and to deter others from violating securities laws by

making violations unprofitable.” Id. Where “individuals or entities collaborate or have a

close relationship in engaging in the violations of the securities laws,” the Court may hold

them jointly and severally liable for the disgorgement of illegally obtained proceeds. Id.

For example, an individual who played the principal role in the fraudulent activities, and

who was the chairman of the board, chief executive officer, and majority shareholder of a

corporation, enjoyed a close relationship with his corporate co-defendant sufficient to

support joint and several liability. Id. at 1192.

The Court has broad discretion in determining the disgorgement amount. S.E.C.

v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1113 (9th Cir. 2006). The disgorgement

amount need reflect only a “reasonable approximation of profits causally connected to the

violation,” and “should include all gains flowing from the illegal activities.” Id. at 1113-14

(quotations omitted). “The SEC bears the ultimate burden of persuasion that its

disgorgement figure reasonably approximates the amount of unjust enrichment.” S.E.C. v.

Platforms Wireless Int’l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010) (quotation omitted).

The SEC may meet this burden by establishing the total proceeds from the violations to

establish a reasonable approximation of the ill-gotten gains. Id. at 1096-97.

If the SEC establishes a reasonable approximation of actual profits, “the burden

shifts to the defendants to demonstrate that the disgorgement figure was not a reasonable

approximation.” Id. at 1096 (quotation omitted). The defendants bear this burden because

they are “more likely than the SEC to have access to evidence establishing what they paid

for the securities, if anything, to whom the proceeds from the sales were distributed, and for

10


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

what purposes the proceeds were used.” Id. (stating “the risk of uncertainty should fall on

the wrongdoer whose illegal conduct created that uncertainty” (quotation omitted)).

Further, a “person who controls the distribution of illegally obtained funds is liable for the

funds he or she dissipated as well as the funds he or she retained.” Id. at 1098.

Finally, the Court has discretion to order prejudgment interest on the

disgorgement amount. Id. at 1099. The Court may set the rate pursuant to the rate provided

in 26 U.S.C. § 6621 for tax underpayments. Id. Additionally, the Court has discretion to

calculate prejudgment interest from the date of the sales of the securities. Id. at 1099-1100.


The Luna Defendants argue the SEC’s disgorgement request is excessive because

it does not offset legitimate business expenses Defendants incurred. The Luna Defendants

also contend any prejudgment interest award must be recalculated based on any reduction in

the disgorgement amount.

The Luna Defendants do not dispute that disgorgement is a proper remedy in this

case, and the Court concludes disgorgement is appropriate as to the Luna Defendants. In

the Court’s prior Order (Doc. #108), the Court found no genuine issue of fact remained that

Luna acted at least recklessly. Ordering the Luna Defendants to disgorge their ill-gotten

gains is warranted both to deprive the Luna Defendants of unjust enrichment, and to deter

others from violating securities laws. Additionally, it is appropriate to hold Luna jointly

and severally liable with his wholly owned company through which he engaged in the

illegal activity. Moreover, the Court, in its discretion, finds that Luna also should be jointly

and severally liable for the disgorgement of amounts transferred to him by Defendants Real

Estate Minnesota, Inc. and Matrix Venture Capital, Inc. As discussed in more detail in the

Court’s prior Order (Doc. #108), Luna collaborated with the other Defendants and Luna

benefitted from the transfer of funds from fellow participants in the scheme. Failing to

award disgorgement of these amounts would unjustly enrich Luna and would not fully

11


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

account for all gains flowing to Luna from his illegal activities.

As to the amount of disgorgement, the SEC has met its burden of establishing a

reasonable approximation of profits by presenting evidence of Defendants’ total proceeds.

(Pl.’s Opening Br., Ex. 1.) The burden thus shifts to the Luna Defendants to establish the

SEC’s disgorgement calculation is not a reasonable approximation of the Luna Defendants’

profits. Although the Luna Defendants contend the disgorgement amount should be offset

by reasonable business expenses, the Luna Defendants present no evidence of any such

expenses. The Luna Defendants therefore have not met their burden of establishing the

SEC’s calculation is not a reasonable approximation of their ill-gotten gains. The Luna

Defendants also have not disputed the SEC’s calculation of prejudgment interest, and the

Court finds that amount reasonable.

The Court therefore will order the Luna Defendants to disgorge $3,904,089,

reflecting proceeds from Defendant St. Paul Venture Fund’s sales in the amount of

$2,030,540, plus $1,750,728 and $122,821 transferred to Luna from Defendants Real Estate

Minnesota, Inc. and Matrix Venture Capital, Inc. The Court also will award prejudgment

interest in the amount of $1,076,717.91, for a total disgorgement award of $4,980,806.91,

for which Defendant Luna and Defendant St. Paul Venture Fund are jointly and severally

liable. Additionally, Defendant Luna is jointly and severally liable with the Daskivich

Defendants for $2,233,565.38 of the total disgorgement amount, reflecting the payments

these Defendants made to Defendant Luna plus prejudgment interest. Defendant Luna also

is jointly and severally liable with the Murtha Defendants for $156,694.12 of the total

disgorgement amount, reflecting the payments these Defendants made to Defendant Luna

plus prejudgment interest.

2. The Montgomery Defendants

The Montgomery Defendants respond that the Court should exercise discretion

and not order disgorgement because the Montgomery Defendants violated a strict liability

12


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

provision of the securities laws, the Montgomery Defendants acted on Luna’s advice, and

the Montgomery Defendants’ conduct did “not caus[e] any harm to the investing public.”

(Montgomery Opp’n at 13.) The Montgomery Defendants also argue that due to

Montgomery’s criminal conviction, Montgomery already owes over $8 million to the

United States and he will be financially unable to satisfy further judgments. The

Montgomery Defendants also contend Montgomery paid $300,000 to acquire the Axis

Technologies Group, Inc. shares and paid taxes on the sales, and these amounts should be

deducted from the requested disgorgement amount.

Ordering the Montgomery Defendants to disgorge their ill-gotten gains is

warranted both to deprive the Montgomery Defendants of unjust enrichment, and to deter

others from violating securities laws. Additionally, it is appropriate to hold Montgomery

jointly and severally liable with his wholly owned company through which he engaged in

the illegal activity. The fact that the Montgomery Defendants were found to have violated a

strict liability provision of the securities laws, as opposed to a provision that requires

scienter, does not negate the propriety of disgorgement as a remedy. The Montgomery

Defendants’ purported reliance on Luna’s advice also does not persuade the Court that

disgorgement is inappropriate. Even accepting Montgomery’s statement in his Certification

as true despite Montgomery’s assertion of his Fifth Amendment rights in response to SEC

questioning on this topic during discovery, the fact remains Montgomery received ill-gotten

gains through a violation of the securities laws. Allowing him to retain those proceeds

would not foster the goals of preventing unjust enrichment and deterring similar violations

by others.

The Montgomery Defendants’ position that they did not cause any harm to the

investing public is unpersuasive. The registration provisions are designed to protect the

public, and Defendants evaded those protections to sell thousands of shares of an

unregistered security to the investing public during a period in which the Axis Technologies

13


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Group, Inc. stock price rose dramatically, resulting in nearly $2 million in proceeds for the

Montgomery Defendants. The suggestion that the Montgomery Defendants’ violation of

the registration provisions was merely technical with no real world consequences is

unconvincing.

As to Montgomery’s financial status, Montgomery already owes over $8 million

to the United States, and thus may lack means to satisfy further judgments. However, the

Montgomery Defendants present no evidence of their financial condition. In any event, the

fact that a defendant has dissipated the ill-gotten gains should not relieve him of a

disgorgement order, particularly because Montgomery is only thirty-three years old and he

may become able to satisfy a judgment in the future.

Finally, the Court will not deduct $300,000 for the funds used to acquire the Axis

Technologies Group, Inc. shares or any amount for taxes paid on the sales. As discussed

above, the SEC has met its initial burden of establishing a reasonable approximation of

profits, and the burden shifted to Defendants to show that amount was unreasonable. The

Montgomery Defendants present no evidence that they were the source of the $300,000.

The Montgomery Defendants also present no evidence of taxes paid.

The Court therefore will order the Montgomery Defendants to disgorge

$1,970,956 in proceeds from Defendant Minnesota Venture Capital, Inc.’s sales. The

Montgomery Defendants have not disputed the SEC’s calculation of prejudgment interest,

and the Court finds that amount reasonable. The Court therefore will award prejudgment

interest in the amount of $543,574.58, for a total disgorgement award of $2,514,530.58, for

which Defendant Montgomery and Defendant Minnesota Venture Capital, Inc. are jointly

and severally liable.


The Daskivich and Murtha Defendants argue disgorgement is an inappropriate

remedy because they violated a strict liability provision, and thus disgorgement would not

14


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

serve a deterrent purpose. These Defendants also argue the evidence shows Luna received

the actual benefit of most of the funds the SEC attributes to Daskivich and Murtha, and thus

they should not be ordered to disgorge the amounts transferred to Luna. Additionally,

Murtha contends he did not receive the benefit of $1,019,000 which was paid to an investor

relation firm. The Daskivich and Murtha Defendants assert they do not have the financial

ability to pay the requested amounts. Finally, they contend the SEC has failed to establish

the Daskivich and Murtha Defendants victimized anyone.

As with the Montgomery Defendants, ordering the Daskivich and Murtha

Defendants to disgorge their ill-gotten gains is warranted both to deprive the Daskivich and

Murtha Defendants of unjust enrichment, and to deter others from violating securities laws.

Although these Defendants contend disgorgement offers no deterrence for violating a strict

liability statute, ordering disgorgement in this case will encourage individuals to be more

careful in complying with the registration requirements. Additionally, it is appropriate to

hold Daskivich and Murtha jointly and severally liable with their wholly owned companies

through which they engaged in the illegal activity.

Similarly, these Defendants’ purported reliance on Luna’s advice does not

persuade the Court that disgorgement is inappropriate. Even accepting Daskivich and

Murtha’s statements in their Certifications as true despite their assertion of their Fifth

Amendment rights in response to SEC questioning on this topic during discovery, the fact

remains Daskivich and Murtha received ill-gotten gains through a violation of the securities

laws. Allowing them to retain those proceeds would not foster the goals of preventing

unjust enrichment and deterring similar violations by others. Additionally, the Court will

not exclude the amounts these Defendants transferred to Luna. The Daskivich and Murtha

Defendants exercised control over the dissipation of the funds, and there is no evidence that

they were required to transfer those funds to Luna.

///

15


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Defendants’ position that the SEC did not prove they caused harm to any

particular investor is unpersuasive. The registration provisions are designed to protect the

public, and Defendants evaded those protections to sell thousands of shares of an

unregistered security to the investing public during a period in which the Axis Technologies

Group, Inc. stock price rose dramatically, resulting in over $4 million in proceeds for these

Defendants. The suggestion that Defendants’ violations of the registration provisions were

merely technical with no real world consequences is unconvincing.

The Daskivich and Murtha Defendants present no evidence of their financial

condition. In any event, the mere fact that a defendant has dissipated the ill-gotten gains

should not relieve him of a disgorgement order, particularly because these Defendants are in

their thirties and they may become able to satisfy a judgment in the future.

Finally, the Court will not deduct $1,019,000 which Murtha contends was paid to

an investor relation firm. As discussed above, the SEC has met its initial burden of

establishing a reasonable approximation of profits, and the burden shifted to Defendants to

show that amount was unreasonable. Murtha presents no evidence showing the funds were

expended for a legitimate business purpose.

The Court therefore will order Defendants Daskivich and Real Estate of

Minnesota, Inc. to disgorge $2,735,924 in proceeds from Defendant Real Estate of

Minnesota, Inc.’s sales. The Daskivich Defendants have not disputed the SEC’s calculation

of prejudgment interest, and the Court finds that amount reasonable. The Court therefore

will award prejudgment interest in the amount of $754,546.93, for a total disgorgement

award of $3,490,470.93, for which Defendant Daskivich and Defendant Real Estate of

Minnesota, Inc. are jointly and severally liable.

The Court also will order Defendants Murtha and Matrix Venture Capital, Inc. to

disgorge $1,378,785 in proceeds from Defendant Matrix Venture Capital, Inc.’s sales. The

Murtha Defendants have not disputed the SEC’s calculation of prejudgment interest, and

16


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

the Court finds that amount reasonable. The Court therefore will award prejudgment

interest in the amount of $350,167.03, for a total disgorgement award of $1,728,952.03, for

which Defendant Murtha and Defendant Matrix Venture Capital, Inc. are jointly and

severally liable.

C. Civil Penalties

The SEC requests the Court impose third tier civil penalties on all Defendants.

The SEC contends Defendants engaged in a carefully planned scheme to reap substantial

profits at the expense of the uninformed public. The SEC also contends that because

Defendants failed to produce evidence of their financial conditions during discovery,

Defendants have not provided the Court with a basis to reduce the penalties.

Under the Securities Act or the Exchange Act, the Court may impose civil

penalties upon a proper showing by the SEC. 15 U.S.C. §§ 77t(d)(1), §78u(d)(3)(A). The

statutes provide tiered options for determining the appropriate penalty. See id. at

§§ 77t(d)(2); 78u(d)(3). First tier penalties are imposed for any violation of the securities

laws. Id. at §§ 77t(d)(2)(A); 78u(d)(3)(B)(i). Second tier penalties are imposed for

statutory violations which involve “fraud, deceit, manipulation, or deliberate or reckless

disregard of a regulatory requirement.” Id. at §§ 77t(d)(2)(B), 78u(d)(3)(B)(ii). Third tier

violations are imposed for second tier violations which also “directly or indirectly resulted

in substantial losses or created a significant risk of substantial losses to other persons.” Id.

at §§ 77t(d)(2)(C), 78u(d)(3)(B)(iii). At each tier level, the penalty imposed shall not be

greater than a specified amount for each tier, or the gross amount of pecuniary gain the

defendant obtained a result of the violation. Id. §§ 77t(d)(2), 78u(d)(3). The Court

determines the penalty amount “in light of the facts and circumstances.” Id. at

§§ 77t(d)(2)(A), 78u(d)(3)(B)(I).

///

///

17


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26


The Luna Defendants argue a civil penalty is not mandatory, and given the other

remedies the SEC requests, a civil penalty would be excessive. The Luna Defendants

contend that having published judgments against them, combined with any bar orders the

Court enters, are sufficient measures to punish the Luna Defendants and deter others. The

Luna Defendants also argue imposing a penalty is excessive because Luna previously has

not had any misconduct in his twenty-year career as an attorney.

In light of the facts and circumstances of this case, the Court concludes second

tier penalties are appropriate for the Luna Defendants. The Court previously determined no

genuine issue of material fact remains that the Luna Defendants violated Section 5 of the

Securities Act, as well as Section 17(a)(1), (2), and (3) of the Securities Act, Section 10(b)

of the Exchange Act, and Rule 10b-5. In the Court’s prior Order, the Court found no

genuine issue of material fact remains that Luna “knew or recklessly disregarded that the

entire process constituted an unregistered public offering not entitled to an exemption, yet

he misrepresented the nature of the transaction to Holladay to obtain unrestricted, free

trading shares to be sold to the general public.” (Order (Doc. #108) at 27.) Imposing a civil

penalty under these circumstances is appropriate to punish the Luna Defendants and to deter

others from engaging in this conduct.

The Court need not decide whether third tier penalties are appropriate because,

regardless, the Court would impose the same penalty amount. Given the large number of

stock sales, the Court finds imposition of the statutory fine amount for each violation would

be excessive. Instead, the Court will impose the gross amount of pecuniary gain to the

Luna Defendants. The Luna Defendants have presented no evidence of their financial

condition to support reducing the penalty. The Court therefore will impose a second tier

penalty in the amount of $2,030,540.

///

18


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

2. The Montgomery, Daskivich, and Murtha Defendants

The Montgomery, Daskivich, and Murtha Defendants contend the SEC’s request

for civil penalties is excessive because they did not act with scienter, they followed Luna’s

advise, and they do not have the means to pay the requested penalties.

In light of the facts and circumstances of this case, the Court concludes first tier

penalties are appropriate for the Montgomery, Daskivich, and Murtha Defendants. The

Court previously determined no genuine issue of material fact remains that the

Montgomery, Daskivich, and Murtha Defendants violated the registration provisions of

Section 5 of the Securities Act, and thus they qualify for first tier penalties. Defendants

participated in a highly coordinated scheme and reaped substantial profits as a result.

Imposing a civil penalty under these circumstances is appropriate to punish these

Defendants and to deter others from engaging in this conduct. A Section 5 violation has no

scienter requirement, however, and the SEC did not move for summary judgment on the

issue of whether these Defendants acted with any particular state of mind to support a

second or third tier penalty. These Defendants each have presented the Court with

Certifications denying they had the requisite intent to support second and third tier

penalties. The SEC failed to move for summary judgment on the scienter issue, and the

Court cannot make a credibility determination at this stage of the proceedings. See M & A

West, Inc., 538 F.3d at 1054-55. The Court therefore concludes that only first tier penalties

are appropriate for these Defendants.

As to the amount of penalties, given the number of stock sales at issue, imposing

a penalty for each violation would be excessive. Instead, the Court will impose the gross

amount of pecuniary gain to each Defendant as a result of the violation. These Defendants

have produced no evidence of their financial condition to support reduction of the penalty.

The Court therefore will impose a first tier penalty in the amount of $1,970,956 against the

Montgomery Defendants, a first tier penalty in the amount of $2,735,924 against the

19


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Daskivich Defendants, and a first tier penalty in the amount of $1,378,785 against the

Murtha Defendants.

D. Penny-Stock and Legal Services Bar

The SEC seeks a penny-stock bar against all Defendants prohibiting them from

participating in an offering of penny stock in the future. The SEC also requests an order

prohibiting Defendant Luna from providing professional legal services in connection with

an offer or sale of securities pursuant to, or claiming, an exemption under Regulation D.

The Court may enter an order prohibiting a party from participating in a

penny-stock offering against “any person participating in, or, at the time of the alleged

misconduct who was participating in, an offering of penny-stock.” 15 U.S.C. §§ 77t(g)(1),

78u(d)(6)(A). In addition to the statutory authority to enter a penny-stock bar, the Court

“has broad equitable powers to fashion appropriate relief for violations of the federal

securities laws.” First Pacific Bancorp, 142 F.3d at 1193. In determining whether to enter a

bar order, the Court considers (1) the egregiousness of the underlying violation, (2) whether

the defendant has previous violations, (3) the defendant’s role in the violation, (4) the

defendant’s “economic stake in the violation,” and (5) the likelihood the defendant will

engage in future misconduct. See id. (quotation omitted).


The Luna Defendants do not oppose a penny-stock bar. (Luna Opp’n at 8.)

However, the Luna Defendants oppose a legal services bar, arguing that Luna’s past record

as an attorney, as well as his future ability to earn a living, weigh against imposing such a

bar.

The Court concludes a penny-stock bar is appropriate as to the Luna Defendants.

As discussed previously, Luna acted with intent and gained over $2 million from his

violations. Additionally, Luna played the central role in the violation, as detailed more fully

in this Court’s prior Order. (Order (Doc. #108) at 26-27.) There is a high likelihood Luna

20


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

will engage in future misconduct. In his Opposition Brief, Luna continues to defend his

conduct in this case, and he requests the Court not impose a legal services bar so that he

may continue to earn a livelihood engaging in similar work. (Luna Opp’n at 2-4, 8-9.) The

Court therefore concludes that both a penny-stock bar and a legal services bar are

appropriate. Specifically, the Court will permanently enjoin the Luna Defendants from

participating in an offering of penny stock, and will permanently enjoin Luna from

providing legal services to any person in connection with an offer or sale of securities

pursuant to, or claiming, an exemption under Regulation D, including, without limitation,

participating in the preparation or issuance of any opinion letter related to such offerings.

This narrowly tailored legal services bar will not preclude Luna from earning a living as an

attorney, does not completely bar him from working in the field of securities law, and is

targeted at Luna’s misconduct in this case.

2. The Montgomery Defendants

The Montgomery Defendants argue a penny-stock bar is not appropriate because

Montgomery relied on Luna’s advice. The Montgomery Defendants also contend a penny-

stock bar is not appropriate because Montgomery is not participating in the securities field,

and he has acknowledged his mistakes in this case.

The evidence produced at summary judgment demonstrated that the Montgomery

Defendants were active participants in a highly coordinated scheme through which they

reaped nearly $2 million. Additionally, Montgomery was involved in another stock scheme

resulting in a criminal conviction. Although Montgomery played a minor role when

compared to Luna, he was not an insignificant player in the scheme. Montgomery’s

assertion that he is no longer participating in the securities field weighs against imposing a

bar, but there is a likelihood that Montgomery could engage in similar conduct in the future

given his previous violation, his willingness to associate with individuals engaged in such

schemes, the rapid realization of profits he enjoyed from his participation in these schemes,

21


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

and his willingness to blame Luna rather than acknowledge his own conduct. Although the

Court concludes, as discussed previously, that a general injunction prohibiting any Section 5

Securities Act violation is too broad, the Court finds a penny-stock bar to be appropriate as

a narrowly tailored remedy to address the likelihood that the Montgomery Defendants will

violate the Securities Act’s registration provisions with respect to a penny-stock offering in

the future. The Court therefore will permanently enjoin the Montgomery Defendants from

participating in an offering of penny stock.


The Daskivich and Murtha Defendants argue a penny-stock bar is inappropriate

because they unknowingly violated a strict liability provision and relied on Luna’s advice.

These Defendants thus contend there is little likelihood of a future violation, particularly for

Daskivich who no longer works in the securities field.

As discussed with respect to the Montgomery Defendants, the evidence produced

at summary judgment demonstrated that the Daskivich and Murtha Defendants were active

participants in a highly coordinated scheme through which they reaped over $4 million.

Although these Defendants played a minor role when compared to Luna, they were not

insignificant players in the scheme. Daskivich’s assertion that he is no longer participating

in the securities field weighs against imposing a bar, but there is a likelihood that Daskivich

could engage in similar conduct in the future given his willingness to associate with

individuals conducting such schemes, the rapid realization of profits he enjoyed from his

participation in this scheme, and his willingness to blame Luna rather than acknowledge his

own conduct. These same concerns apply to Murtha, who does not indicate he no longer

works in the securities field, thus raising a heightened possibility that Murtha will engage in

future violations. Although the Court concludes, as discussed previously, that a general

injunction prohibiting any Section 5 Securities Act violation is too broad, the Court finds a

penny-stock bar to be appropriate as a narrowly tailored remedy to address the likelihood

22


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

that the Daskivich and Murtha Defendants will violate the Securities Act’s registration

provisions with respect to a penny-stock offering in the future. The Court therefore will

permanently enjoin the Daskivich and Murtha Defendants from participating in an offering

of penny stock.

III. CONCLUSION

IT IS THEREFORE ORDERED that Plaintiff Securities and Exchange

Commission’s Opening Brief in Support of Plaintiff Securities and Exchange Commission’s

Request for Remedies (Doc. #109) is hereby GRANTED in part and DENIED in part.

IT IS FURTHER ORDERED that Defendants Marcus Luna and St. Paul Venture

Fund LLC are hereby permanently enjoined from participating in an offering of penny

stock.

IT IS FURTHER ORDERED that Defendant Marcus Luna is hereby permanently

enjoined from providing legal services to any person in connection with an offer or sale of

securities pursuant to, or claiming, an exemption under Regulation D, including, without

limitation, participating in the preparation or issuance of any opinion letter related to such

offerings.

IT IS FURTHER ORDERED that Judgment is hereby entered in favor of

Plaintiff Securities and Exchange Commission and against Defendant Marcus Luna and

Defendant St. Paul Venture Fund as follows:

• $4,980,806.91 in disgorgement plus prejudgment interest, for which Defendant

Luna and Defendant St. Paul Venture Fund are jointly and severally liable.

Additionally, Defendant Luna is jointly and severally liable with the Daskivich

Defendants for $2,233,565.38 of the total disgorgement amount, reflecting the

payments these Defendants made to Defendant Luna plus prejudgment interest.

Defendant Luna also is jointly and severally liable with the Murtha Defendants

for $156,694.12 of the total disgorgement amount, reflecting the payments these

23


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Defendants made to Defendant Luna plus prejudgment interest.

• $2,030,540 in civil penalties, for which Defendant Luna and Defendant St. Paul

Venture Fund are jointly and severally liable.

IT IS FURTHER ORDERED that the Clerk of Court shall provide a copy of this

Order and a copy of the Court’s prior Order (Doc. #108) to the State Bar of California for

such action, if any, it deems appropriate with respect to Defendant Marcus Luna who is a

licensed member of the Bar.

IT IS FURTHER ORDERED that Defendants Nathan Montgomery and

Minnesota Venture Capital, Inc. are hereby permanently enjoined from participating in an

offering of penny stock.


Plaintiff Securities and Exchange Commission and against Defendants Nathan Montgomery

and Minnesota Venture Capital, Inc. as follows:


Montgomery and Defendant Minnesota Venture Capital, Inc. are jointly and

severally liable.

• $1,970,956 in civil penalties, for which Defendant Montgomery and Defendant

Minnesota Venture Capital, Inc. are jointly and severally liable.

IT IS FURTHER ORDERED that Defendants Adam Daskivich and Real Estate

of Minnesota, Inc. are hereby permanently enjoined from participating in an offering of

penny stock.


Plaintiff Securities and Exchange Commission and against Defendants Adam Daskivich and

Real Estate of Minnesota, Inc. as follows:


Daskivich and Defendant Real Estate of Minnesota, Inc. are jointly and severally

24


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

liable.

• $2,735,924 in civil penalties, for which Defendant Daskivich and Defendant

Real Estate of Minnesota, Inc. are jointly and severally liable.

IT IS FURTHER ORDERED that Defendants David Murtha and Matrix Venture

Capital, Inc. are hereby permanently enjoined from participating in an offering of penny

stock.


Plaintiff Securities and Exchange Commission and against Defendants David Murtha and

Matrix Venture Capital, Inc. as follows:


Murtha and Defendant Matrix Venture Capital, Inc. are jointly and severally

liable.

• $1,378,785 in civil penalties, for which Defendant Murtha and Defendant

Matrix Venture Capital, Inc. are jointly and severally liable.

DATED: June 27, 2014

_______________________________ PHILIP M. PRO United States District Judge

25


Documents

UNITED STATES DISTRICT COURT DISTRICT OF NEVADA … · Montgom ery (“Montgom ”), Adam Daskivich (“Daskivich”), and David Murtha (“Murtha”), and their respective entities,